We all dream of retirement. That glorious day when we kiss our boss goodbye, kick up our legs and drink fruity drinks in tropical paradise.
Most of us think of retirement in traditional terms. We spend our prime years – age 25 to 65 – working at a job that we barely tolerate or even hate. Our souls die a little or a lot, but we keep on doing what I like to call the Zombie March every day thinking that someday retirement (or death) will ease our suffering. And the zombies are right. Someday death will come.
For our parents’ generation, the Baby Boomers, traditional retirement might happen. Some of them still have pensions and a percentage of those won’t fail. Social security may provide enough money to buy cat food (probably even the good stuff) and a teeny-tiny percentage of our elders have accumulated enough wealth to retire at the standard of living they are accustomed to. However, the vast majority of the Baby Boomers will likely work until they die, doing something they hate, since they didn’t invest enough and can’t lower their standard of living to a level Social Security can support.
Traditional retirement is even further out of reach for our generation. Though we have inherited the massive consumption habits of our parents’ generation, we have inherited a few other things too. Namely massive amounts of federal, state and municipal debt stacked on top of unfunded pensions a student loan bubble that is about to pop (it’ll be louder than the housing bubble) and a highly depleted social security system. In short, America is going to be a mess before we even reach retirement age. Yep, it’s scary as hell and bleak for those who choose the Traditional Path.
Given that the Traditional Path is a path to misery and a cat food diet, what can we do to get off it?
In this post, I’m going to talk about traditional retirement, why it doesn’t work, and some alternatives we should all consider adopting. To keep things moving in the right direction, I’ll give these alternatives some super-sweet names and then I’ll let you know what alternative I’m going to choose. Once my alternative is chosen, I’ll invite you to follow me on my journey to retirement.
THE PATH TO GLORY
There are really three paths you can take to avoid a life of misery two of them involve dramatic spending cuts that most people are unwilling to make, the other involves accepting the fact that you will work until you die.
Before we get into the paths to success, let’s briefly dispatch the Traditional Path to retirement. The Traditional Path, if executed properly, might lead to a retirement of sorts. To properly execute the Traditional path, you must start saving early and in fairly large quantities. The majority view has been that to maintain the same standard of living in retirement, a person must invest 10% of their take-home pay starting in their early 20s and continue to invest until their late 60s. Unfortunately, almost no Americans actually save this amount. A recent survey showed that people approaching retirement had a median savings of about $100,000.00. Seems like a lot of money, but it isn’t enough to retire for people who are used to spending all of their middle-class salary. Moreover, the survey probably overstates savings because people were allowed not to answer or to answer that they didn’t know what they had. Those individuals were likely well below the median.
The Traditional Path just doesn’t work and there are a thousand webpages out there establishing that. It’s time to move on to the fun stuff.
Be Happy is the only path that doesn’t require dramatic cuts in spending. Since Americans really, really, suck at cutting their spending, this is where you will most likely find success. My mother always told me that I should find a job I love because I would spend most of my life working. Be Happy is following that advice. An adherent to Be Happy would say, “Listen, I’m going to spend all my income on iphones, lattes, organic popcorn and McDonalds. Hell, maybe I’ll double fist the lattes – I deserve it. I like driving my leased Mercedes and that boat I use three times every summer makes me feel good. Because I love consuming nearly every cent I have, I accept that I will work until I am no longer physically able.” Be Happy might get a little traditional retirement when he is 80 if Social Security is still around.
The key to the Be Happy path is finding a job you love. Find a job that is meaningful to you; one that makes you excited to get up in the morning. If you hate your job, you better be looking for a new one – this is your life. You should choose joy over salary and pick a career that is not physically demanding. Nobody can be a lumberjack in their 80s.
The Be Happy plan is the best reality has to offer to 80-90% of Americans.
I CAN DESTROY SPENDING
So this Be Happy plan isn’t for you – Hell, you’re pretty hardcore and think you can cut your expenses down, way down. I can’t give you a precise number since the cost of living varies dramatically throughout this country, but if you can get your spending down to about $30,000 a year, you can do some real damage. For those up to the challenge, there are two plans that may fit your situation.
I like to call the next plan The Tempest. The Tempest isn’t available to everyone – you can be the best ever at cutting debt, but if your income isn’t very high, it isn’t for you. When I read one of my favorite blogs, Mr. Money Mustache, I am often reminded of The Tempest.
Adherents to The Tempest are high wage earners that cut their spending to the bone. Their co-workers live in McMansions and they live in studio apartments. This class of people wants to “retire” very, very, early. Retirement before 40 is not out of the ordinary for this group. Usually Tempests are fairly high wage earners and tend to be in the technology/engineering fields. Lawyers, doctors and investment bankers could also be adherents to this religion, but they are among the worst at not wasting their money on shiny objects. Tempests destroy shiny object obsessions.
The plan here is simple, you go to your job, you might hate it, but you bust your butt for 5-10 years bringing in 6 figures and invest it. Making so much money seems like a dream to most, and it is, which is why The Tempest works for so few. However, we are in their dream-land right now, so lets make it even more special and add that their spouse is also a frugal high income earner ala Mr. Money Mustache. With a combined income of $150,000 to $200,000+ and spending around $30,000 to $50,000 per year, those investment accounts grow and compound amazingly fast.
Banking $75,000 for 10 years at a 7% rate of return ads up to over $1 million dollars. That’s enough to continue the modest lifestyle indefinitely, especially if the “retiree” earns a bit of money on the side while keeping themselves busy.
MAKER OF MINIONS
Recognizing that such astronomical incomes aren’t in the cards for the most of us, I’ve brainstormed a third way to work toward the good life – the path I will be taking and hopefully chronicling here. I’ll call this plan the Maker of Minions. Why? Because I really like the word minion.
The Maker of Minions first cuts spending down as low as possible. While it is possible to make a fortune if you have enough minions, or powerful minions, success is found much more quickly if you need little.
Next, the Minion Maker starts creating side businesses. The key to this is that these businesses should be able to run themselves to a greater or lesser extent eventually, clearing the way for the creation of more minions. Starting a consulting company, a law firm, providing personal tutoring or any other business that involves selling your time does not qualify as a minion. Some of my favorite people using this plan are Pat Flynn and Spencer Haws.
You then set your minions on autopilot (or as close to autopilot as possible) and either let them earn you enough to live on or you make more minions until you are satisfied. The minions tend to be Internet based businesses, but they don’t have to be. Some people have made great money starting lawn care companies and other bricks and mortar companies run by employees.
Going forward, I am going to try to become a Minion Maker and I hope you follow me or even join in. We all have some unique challenges and I’ll be open and honest about mine.
In my next post I’ll walk you through the first step: figuring out where your money is spent.